Eastern & Oriental Bhd
(June 19, RM1.72)
Maintain neutral with a target price (TP) of RM2: Eastern & Oriental Bhd (E&O) is selling its subsidiary E&O Express Sdn Bhd which owns and operates the Lone Pine Hotel in Batu Ferringhi, Penang, for RM85 million. This is consistent with plans to dispose of non-core assets to lighten its debt.
We understand that the bulk of the proceeds will be used for working capital and the repayment of bank borrowings (totalling RM83.9 million net of sale expenses). E&O expects to realise an estimated gain on disposal after taxation of about RM23.3 million upon the completion of the deal.
Net gearing is expected to improve from 0.75 times to 0.71 times after the completion of the disposal. To recap, the company has plans to lower its net gearing to about 0.5 times in the near term.
We maintain “neutral” and a TP of RM2, pegged at 50% discount to revalued net asset valuation.
E&O has signed a share sale agreement with Langkawi Saga Shopping Centre Sdn Bhd and Lubritrade Trading Pte Ltd to effect the disposal of the Lone Pine Hotel. The proposed sale is expected to be completed by October 2017.
We are positive on the asset sale as this will strengthen the group’s balance sheet via realising cash resources which can then be deployed into identified projects and investments to maximise returns.
We understand that the annual interest savings (assuming all net proceeds are used to pare down debt) are estimated to be about RM4.6 million. We keep our earnings estimates unchanged for now pending completion of the deal.
As mentioned in our earlier report, we believe that E&O has certain other non-core assets that could be disposed of, such as Straits Quay Retail (RM233 million book value), and non-strategic land bank such as its 0.9-acre (0.36ha) land in Jalan Liew Weng Chee (off Jalan Yap Kwan Seng) that has a market value of about RM55 million. If the price is right, we believe that it will also offload its overseas undeveloped land bank. — PublicInvest Research, June 19
This article first appeared in The Edge Financial Daily, on June 20, 2017.